THE DIVIDEND ADVANTAGE

OCTOBER 2018

THE DIVIDEND ADVANTAGE

The 10 Reasons Why Rebating All Carbon Fee Revenues Directly to the American People Offers the Most Popular,

Equitable and Politically Viable Climate Solution

by

George P. Shultz Ted Halstead

ABOUT THE AUTHORS

GEORGE P. SHULTZ served as Secretary of State under President Ronald Reagan, and as Secretary of Treasury and Labor under President Nixon. He is the Thomas W. and Susan B. Ford Distinguished Fellow at the Hoover Institution.

TED HALSTEAD is the founder, Chairman & CEO of the Climate Leadership Council. Previously, he founded New America, a leading public policy think tank. He is co-author of The Radical Center: The Future of American Politics.

THE DIVIDEND ADVANTAGE

1. MOST POPULAR

6. PRO-GROWTH

2. CARROTS TRUMP STICKS

7. RESTORING TRUST IN GOVERNMENT

3. MOST EQUITABLE

8. POSITIVE FEEDBACK LOOP

4. MOST DURABLE

9. BORROWING BONUS

5. REGULATORY SIMPLIFICATION 10. CLOSING PANDORA'S BOX

ABOUT THE CLIMATE LEADERSHIP COUNCIL

The Climate Leadership Council is an international research and advocacy organization founded in collaboration with a who's who of business, opinion and environmental leaders to promote a carbon dividends framework as the most cost-effective, equitable and politically-viable climate solution. Find out more at .

EXECUTIVE SUMMARY

There is widespread agreement among economists that a carbon fee offers the most cost-effective way to reduce greenhouse gas emissions. Top corporations and environmental groups, as well as opinion leaders from across the political spectrum, are increasingly converging around the idea. As support for a revenue-neutral carbon fee grows, however, there are diverging views about how to use the revenue.

Interest groups are lining up behind a variety of potential revenue uses, ranging from: cutting the deficit; reducing corporate or personal taxes; investing in green technologies and infrastructure; and financing climate adaptation and remediation.

In assessing possible revenue uses, it is critical to recognize that the primary obstacle to a carbon fee has long been political. The key to making a carbon fee popular and politically viable is finding a countervailing incentive that outweighs the fee's burden. The best candidate is carbon dividends, which would put money directly into people's hands.

" Over two-thirds of American households would be financial winners under a carbon dividends program, including the most vulnerable

Simply put: all proceeds from a nation's carbon fee would be divided equally among its citizens and returned directly to them. Conferring financial benefits in the here and now would

fundamentally alter the cost-benefit time horizon of climate mitigation, re-casting a carbon fee as a popular and even populist solution.

" A major advantage of pairing carbon fees with dividends is that the latter's popularity would ensure the policy's longevity, giving environmentalists and businesses the confidence they need to strike a lasting political bargain

Carbon dividends also open the door to business and bipartisan support, which will require trading a robust carbon price for regulatory relief. Striking this "grand bargain" will hinge on both sides believing it will hold: environmentalists must be assured that the carbon fee rate will continually increase until emissions targets are met, while businesses and conservatives must be assured the corresponding regulatory simplification will last.

A major advantage of pairing carbon fees with dividends is that the latter's popularity would ensure the policy's longevity, giving environmentalists and businesses the confidence they need to strike a lasting political bargain.

Climate policy in the United States has been deadlocked for far too long, forestalling what economists of all stripes agree is the most costeffective solution. The key to unlocking this puzzle is selecting the most popular, equitable and politically viable use of carbon fee proceeds.

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1. MOST POPULAR

Public support for pricing carbon is highly dependent on how the revenue is used. By far the most popular use ? by a ratio of 3 to 1 ? is returning the proceeds directly to all citizens in the form of dividends.1 The reason for this popular appeal is obvious: over two-thirds of American households would be financial winners under a carbon dividends plan. Recent polling reveals that a majority of Americans favor a carbon dividends plan, including support by a 3 to 1 margin among Republican voters.2 Among 18-35-year-olds ? the cohort that will determine the future of any party ? support reaches 4 to 1. No other approach to carbon pricing comes close to this level of popular support.

The Alaska Permanent Fund Dividend illustrates the enduring popularity of dividends. Enacted in 1982 by a Republican Governor in a Republican state, it provides over $1,000 per year to each state resident. This program has consistently proven popular across all income groups, turning it into a "third rail" that has withstood all efforts to tamper with it. The dividend is particularly popular among the 72% of Alaskans who make less than $50,000 per year. But even Alaskans making more than $100,000 per year prefer the dividend to income tax cuts.3 The durability and popularity of the Alaska dividend provides an important lesson for carbon fee advocates.

" The majority of Americans favor a carbon dividends plan, including support by a 3 to 1 margin among Republican voters and by a 4 to 1 margin among 18-35-year-olds

2. CARROTS TRUMP STICKS

The primary impediment to US climate progress may be the least recognized: a fundamental psychological barrier. The prevailing message espoused by climate advocates, at its core, is that we should make short-term sacrifices now for the benefit of other people, in other countries, thirty to forty years in the future. This runs contrary to what extensive psychological research confirms is our "loss aversion" preference: we place a higher value on avoiding short-term pain, even if it leads to greater long-term gain.4, 5 Like it or not, human nature is inherently self-interested, and we will only solve our climate problem at the required scale and speed if we recognize this.

A winning climate strategy must offer the public a countervailing "carrot" that more than compensates them for the necessary "stick" of higher fossil fuel prices. The most politically viable way to do so is by rebating the proceeds from a carbon fee directly to all American citizens on an equal basis. And this carrot is quite significant: a family of four could receive approximately $2,000 in dividends per year. The appeal of cash dividends offers a game changing "saliency" that is immediately tangible to ordinary citizens. This fundamentally alters the costbenefit time horizon for climate action, while re-messaging a carbon fee around a far more compelling narrative.

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THE DIVIDEND ADVANTAGE

3. MOST EQUITABLE

A common concern is that carbon fees can be regressive, imposing a disproportionate burden on the least fortunate. Combining carbon fees with dividends solves this problem and ensures that the most vulnerable come out ahead. The reason is simple: the wealthier tend to pollute more, and therefore would face higher costs. Importantly, however, these dividends are neither giveaways nor a new entitlement. Since costs increase in direct proportion to one's carbon footprint and all citizens receive identical dividends, everyone is rewarded equally for reducing their carbon footprint.

Numerous studies confirm the distributional advantages of dividends over all other uses of carbon fee proceeds.6 For example, the US Treasury found that 70% of American households would benefit, because on average they would receive more in dividend payments than they would pay in increased energy prices.7 And the bottom income deciles ? those who have the most trouble making ends meet ? would experience the greatest net gains. The dividend pathway is the only approach to carbon pricing that would result in higher median household incomes for the vast majority of Americans, across all 50 states.8, 9

" The dividend pathway is the only approach to carbon pricing that would result in higher median household incomes for the vast majority of Americans, across all 50 states

4. MOST DURABLE

Two frequent misconceptions about carbon pricing are that enacting the initial fee is the main political hurdle and the fee rate need not increase year to year. Neither is correct. For a carbon fee to meet agreedupon emissions reduction targets, it must increase every year. British Columbia demonstrated this. When BC introduced a steadily rising carbon fee in 2008, emissions declined as intended. But when the carbon fee stopped increasing in 2013, emissions began rising again.10 Enacting a continually rising carbon fee that is immune to a popular backlash and to repeal efforts by future Congresses is a far greater political challenge.

The only way to guarantee this policy durability is by rebating the revenue directly to the American people, thereby creating a "hook" that cannot be undone. For example, the popularity of Alaska's dividend model turned it into a lasting program with decades of broad bipartisan support. Similarly, a national carbon dividends program may be the only climate solution capable of withstanding the political test of time. And this durability is a necessary pre-condition to strike a grand bargain capable of uniting Republicans and Democrats, businesses and environmentalists, and ultimately the American people, around a bipartisan climate breakthrough.

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